The Terrible Timing of Share Buybacks

By Sam Mamudi

[They] may have surged in this cycle but they are a highly cyclical element of corporate distribution and are never there when you really want valuation support i.e., in the midst of a bear market…The timing of share-buybacks seems specifically designed to destroy value – buying shares when they are expensive in the wake of a huge rally. I know my market timing may not be up to much but corporate treasurers seem to be even worse!

To support that assertion there’s this:

Societe Generale

(Click for larger version.)

You can see from that how closely buybacks hew to the rise and fall of the stock market. And as Edwards writes, you can also note that buybacks seem to be turning back down again — which, if the correlation to markets holds, could be bad news for everyone.

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FEBRUARY 14, 2013 10:48 P.M.

Mike Andrews wrote:

SG is completely wrong with that assertion, too bad he didn't actually do nor read the research on buybacks:

Btw 2004 and 2011, SP500 firms averaged ~$400Bn a year on buybacks, and earned an estimated $440Bn in profits.

His chart ignores the power of compounding. Look at the returns on the $tens of billions that Exxon alone bought in the 20s, 30s, 40s, etc.

And Edwards is willfully ignorant to pretend nobody bought back shares at the bottom. Guys like Steve Wynn did spot secondaries at $160 and used the cash to retire shares at $60. Sure, it went lower, but he made $100 on each share he retired for the rest of us shareholders.

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